Bill Waugh/AP Photo
- Trends in the current recovery are eerily similar to those that sparked the recession of the early 1990s.
- Sour economic sentiments, high oil prices, and an inflation-fighting Fed all fueled that downturn.
- A recession isn’t a given, but the slump of the early ’90s gives hints as to how such a decline could start.
With recession fears spreading across the US, economists are looking to previous downturns for clues as to how the economy will fare in the months ahead.
Many have looked to the Great Recession, citing how the housing market is the hottest its been since the mid-2000s bubble that sparked the financial crisis. Others argue the next downturn will mirror the 1970s, when slow economic growth and sky-high inflation pulled the US into a period of crippling stagflation.
A deeper dive into current trends and a 1993 paper from the Federal Reserve suggest a near-term downturn will most closely resemble the recession of the early 1990s. Many of the factors that caused that downturn have emerged in recent months, particularly in the wake of Russia’s invasion of Ukraine. After the unusual bubble-fueled recessions of the early 2000s and the coronavirus crisis, the US could soon slide into its first traditional downturn in three decades.
The 1993 paper, published by the San Francisco Fed, lays out several causes for the early 1990s recession. They include “pessimistic consumers,” elevated oil prices linked to Iraq’s invasion of Kuwait, and “attempts by the Federal Reserve to lower the rate of inflation.”
If that sounds familiar, it should. The economy is currently dealing with those very same trends, and if the 1990 downturn is precedent, the US could be in for an extremely similar recession.
The Fed is ramping up its fight against inflation
Those forecasting a recession in the next year see the Fed’s actions as the main driver. The central bank kicked off its fight with higher inflation in March, raising interest rates from historic lows and signaling it will keep hiking rates well into 2023. Yet inflation accelerated through March to the fastest pace since 1981, raising concerns that the Fed acted too late. The biggest risk, according to hawkish economists, is that the Fed will have to lift rates so aggressively that it’ll slam the brakes on economic growth and stop the recovery in its tracks.
A similar dynamic played out in the early 1990s. The Fed aggressively hiked rates from 1988 to 1989 as inflation started to climb back to the highs of the previous decade. The higher rates weakened the economy while it was still rebounding from the recession of the early 1980s and laid the foundation for the coming downturn.
The Fed’s actions left the economy “already significantly weakened” by the time the recession started in 1990, economists at the San Francisco Fed wrote, adding that the restrictive monetary policy kept the economy “relatively flat” when it otherwise would’ve kept growing.
With prices still surging and the Russia-Ukraine conflict risking persistently high inflation, it could take a similarly aggressive strategy from the Fed to pull price growth to healthy levels.
Foreign conflict is pushing oil prices to worrying highs
In 1990 it was Iraq’s invasion of Kuwait that roiled the global energy market and boosted crude oil prices sharply higher. In 2022 it’s Russia’s invasion of Ukraine and related sanctions on Russian energy commodities doing the same.
The most obvious impact for typical Americans — both in the early 1990s and today — are higher prices at the pump. Though gas prices have fallen slightly from the mid-March peak they still sit near record levels.
Yet pricier oil reverberates throughout the global economy. Trade and shipping become more expensive, as it costs more to transport goods both within and across borders. Americans tend to rein in their spending and don’t travel as much, leaving the economy with diminished activity. Manufacturing processes that rely on oil are also hit, leading to higher prices for various goods and the beginnings of an inflationary cycle.
Consumer spending remains strong, but the pace of growth is slowing. If oil prices stay elevated it could soon sap demand from the still-incomplete recovery.
Americans are feeling pretty sour about the economy
“Pessimistic consumers” played a major role in powering the downturn of the early 1990s, and Americans aren’t feeling much better today.
Economic attitudes, as measured by the University of Michigan’s sentiment index, are the second-weakest since 2011. Inflation is the biggest drag on Americans’ recovery hopes, with respondents citing high gas prices as a particularly concerning strain on their finances.
While April’s survey showed improvement, the university’s gauge is “still too close to recession lows to be reassuring,” Richard Curtin, chief economist for the Surveys of Consumers, said in the early April report. Another decline in economic moods could see spending activity dramatically slow and overall growth cool.
There are some differences between now and 1990, however
To be sure, today’s economy is much stronger than it was heading into 1990. The labor market is extraordinarily tight, with job openings still significantly exceeding the number of available workers. Wage growth has been historically strong, and millions of workers have quit their jobs over the past several months to take advantage of strong labor demand.
Fed Chair Jerome Powell rebutted recession worries in March, saying during a press conference that the economy “will be able to flourish … in the face of less accommodative monetary policy.”
The Fed is also in a very different policy stance than it was thirty years ago. While the central bank was raising interest rates through the late 1980s, it held rates near zero throughout the pandemic.
Policymakers’ latest actions were more geared toward removing crisis-era aid than restricting economic growth, and no forecasts of future interest rates see the Fed’s benchmark coming close to the nearly 10% highs seen in 1989. Various signals also suggest inflation peaked in March, signaling the Fed won’t have to raise rates nearly as high to cool price growth.
Yet fears of a downturn remain, and if the US is destined for an economic slump, the recession of the early 1990s gives some hint as to what will cause it.
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